Financials Are Breaking (more) Support While Rotating Into the Lagging Quadrant On The RRG

On the Relative Rotation Graph for US sectors, the tail on XLF, the Financials sector, caught my eye this morning. After a short stint through the leading quadrant, XLF had a sharp turn lower and entered the weakening quadrant, in which it spent only three days before rotating into lagging.

RRG-Velocity

This RRG, or the tail for XLF on this RRG, is a good example of how RRG-Velocity works. RRG-Velocity is the distance between the observations on the tail. While moving into the leading quadrant 16 days ago, the velocity was low.

Low velocity means "easier turns." Compare it to driving a car - at high speeds, it is much more difficult to make a sharp turn than when you drive at slow speeds.

When the turn completed and XLF rolled over, heading lower and into the weakening quadrant, the RRG-Velocity started to increase/accelerate. In RRG terms, this indicates that there is power behind the move.

Current Position

At this point in time, XLF is now well inside the lagging quadrant and pushing deeper into it. This rotation matches with the behavior on the price chart, where XLF closed the gap that was made on 5 August and then started accelerating lower, breaking its previous low yesterday.

The next level to watch for support (imho) is $25.75 followed by $25.00, while the old support levels above will start to act as resistance. This makes upside movement for XLF difficult/unlikely.

The rotation into the lagging quadrant on the Relative Rotation Graph indicates relative weakness. That weakness is now getting fueled by the break below the previous relative low that was set in June.

All in all, things do not look good for XLF - and when things do not look good for the third largest sector in the S&P 500, it does not bode well for the market as a whole.

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Feedback, comments or questions are welcome at Juliusdk@stockcharts.com. I cannot promise to respond to each and every message, but I will certainly read them and, where reasonably possible, use the feedback and comments or answer questions.

To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.

Announcement from the Author

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About the author:Julius de Kempenaer is the creator of Relative Rotation Graphs™. This unique method to visualize relative strength within a universe of securities was first launched on Bloomberg professional services terminals in January of 2011 and was released on StockCharts.com in July of 2014.
After graduating from the Dutch Royal Military Academy, Julius served in the Dutch Air Force in multiple officer ranks. He retired from the military as a captain in 1990 to enter the financial industry as a portfolio manager for Equity & Law (now part of AXA Investment Managers).
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